The Unforeseen Consequences Of China’s Insatiable Oil Demand

While it’s true that China’s crude oil imports recovered slightly in July, it was still among the lowest so far this year due to a decline in demand from smaller so-called independent “teapot” refineries.

However, for the first seven months of the year, China imported some 8.98 million barrels per day (bpd) of crude oil, up 5.6 percent from a year earlier. Total natural gas imports, including both pipeline gas and liquefied natural gas (LNG), rose to 7.38 million tonnes during the same period, up 28.3 percent from a year ago, according to customs data.

Moreover, amid both economic growth as well as Beijing’s mandate that gas make up at least 10 percent of the country’s energy mix by 2020 to offset the effects of rampant air pollution from dirtier thermal coal power production, the long term trajectory for both China’s natural gas consumption, as well as oil usage, will continue to increase, posing both a geopolitical and financial dilemma for the country that the U.S. and many western powers grappled with for decades.

Gas matters

Going forward, China’s gas demand is projected by the IEA to rise by 60 percent between 2017 and 2023 to 376 billion cubic meters (bcm), including a spike in its LNG imports to 93 bcm by 2023 from 51 bcm last year. The IEA has also projected that China will become the world’s top natural gas importer (both pipeline and LNG) by next year.

This marked increase in Chinese LNG procurement has changed the global LNG market from one that was projected to remain in a supply overhang scenario until around 2022 or even later to one that is now projected to have possible shortfalls of the super-cooled fuel around the same time frame. It has also ushered in new confidence for global LNG producers and talk of pushing ahead more greenfield LNG projects to meet this demand, a possibility unheard of just a year ago.

This increase in gas usage will also mean that China’s domestic gas output, though it will be the world’s fourth largest gas producer by 2023, will be unable to keep up, with China increasingly becoming more reliant on gas imports from both established LNG producers like Australia, the U.S. (current trade tensions notwithstanding) and Russia, but also more geopolitically volatile producers such as Qatar, still the world’s top LNG producer, Yemen, Oman, Papua New Guinea, in time Mozambique, and others.

Stellar GDP growth

However, even more problematic for China than its increasing gas consumption projections will be its continued oil thirst. China’s oil usage continues to increase amid a GDP growth rate that has been the envy of the western world. Admittedly, China’s economic growth is slowing but the question has to be asked, slowing from what level?

China had double-digit real GDP growth for much of 1980–2005, and energy demand more than tripled during that time. In 2010, China’s GDP grew at a stellar 10.61 percent, followed by 9.4 percent the next year. In 2012 and 2013 China’s GDP growth for both years reached nearly 8 percent, followed by an average GDP growth rate of 6.925 percent between 2014 and 2017. China’s economic growth rate did slip in Q2 this year but it still came in at an impressive 6.7 percent. The U.S., for its part, has not posted a GDP growth rate above 5.12 percent since 2006.

Oil thirst remains problematic

China surpassed the U.S. in annual gross crude oil imports in 2017, importing 8.4 million bpd compared with 7.9 million bpd for the U.S. China had become the world’s largest net importer (imports minus exports) of total petroleum and other liquid fuels in 2013.

Last year, 56 percent of China’s oil imports came from OPEC members. Though that was a marked decline from a peak 67 percent in 2012, it still represents over half of the country’s demand derived from OPEC members. Moreover, as China prepares to decrease imports of U.S. crude oil, OPEC imports, in addition to Russia, will increase to replace lost U.S. barrels.

This over reliance on imports from individual OPEC members puts China in a geopolitically precarious situation.

Though China could indeed see oil demand growth slow in coming months, in part due to the ongoing trade row with the U.S., in the mid to long term China’s oil consumption thus its reliance on foreign oil will continue to grow. The IEA said recently that China’s oil demand could reach 15.5 million bpd by 2040, after peaking in 2030.

Along with supply risk attributed to over reliance of imported foreign crude, there is the issue of transfer of wealth, again something that plagued the U.S. for nearly 40 years and forced its hand as it became involved in countless military endeavors in the Middle East.

Oil demand problems for China are being exacerbated by its maturing onshore oil fields and the inability to discover and develop new fields in sufficient quantity to offset these production loses – perhaps one reason China has pushed so hard recently in the thought to be oil and gas rich South China Sea.